STAN SPURLOCK, from left, retired Mississippi State University agricultural economics professor; Joe Mallard, Mississippi Land Bank, Tupelo, Miss.; George Hopper, dean/director of the MSU College of Agriculture and Life Sciences; and Randy Knight, president, Mississippi Farm Bureau Federation, were among participants in the annual meeting of the Mississippi Agricultural Economics Association.

Axing direct payments: A non-event for farmers?

For many Mid-South farmers, income from government farm programs is part of the income stream to their land, and reduction or elimination of direct payments has the potential to affect land values, says Bert Greenwalt, professor of agricultural economics at the Arkansas State University College of Agriculture and Technology. "Given pressures to restrain government spending, direct payments are potentially on the chopping block — and that’s a concern for many Mid-South growers,” he said at the Mississippi Agricultural Economics Association’s annual conference at Mississippi State University.

While elimination of direct payments would have little economic impact on land values and profitability for Midwest grain producers, it would be a different story for Mid-South soybean/rice growers, and to an extent some cotton growers, says Bert Greenwalt.

“Given pressures to restrain government spending, direct payments are potentially on the chopping block — and that’s a concern for many Mid-South growers,” he said at the Mississippi Agricultural Economics Association’s annual conference at Mississippi State University.

Greenwalt, who farms with his family at Hazen, Ark., and is professor of agricultural economics at the Arkansas State University College of Agriculture and Technology, noted that over a year ago the Iowa Farm Bureau went on record advocating that Congress eliminate direct payments — “although they did recognize that there are regional differences, and that southern rice and cotton farmers favor the payments.”

At a commodity marketing seminar in Memphis in the summer of 2010, he says, “a Midwest land broker made the statement that eliminating farm programs would be a non-event for land values. I could see people in the audience whispering about that, and many questioned his assertion.”

Federal Deposit Insurance Corporation Chairman Sheila Baird was widely quoted last year about high farmland values and the potential fallout to agriculture if those values should become another asset price bubble, similar to the one preceding the crash of the commercial real estate market.

Net income from crop production has been strong recently, Greenwalt says, and while the short-run outlook for commodity prices is good, farmers know that markets often can turn and bring sharp downturns.

For many Mid-South farmers, income from government farm programs is part of the income stream to their land, he says, and reduction or elimination of direct payments has the potential to affect land values.

“Base acre direct payments for rice are the highest, at $94.30,” he says, “followed by cotton, $34.30; corn, $22.90; and soybeans, $11.40.

“In my part of the Arkansas Grand Prairie, farmers grow rice and soybeans in a rotation, so I looked at a blended base for those two crops in a 50/50 ratio and for a blended 50/50 corn/soybean base in the Midwest.

“For the 50/50 corn/soybean base that’s typical in the Midwest, the average direct payment is $17.15 per acre — but for a 50/50 rice/soybean base in the Mid-South, it’s $52.85 per acre. So you can see, there’s a huge difference in the income stream from direct payments between the two regions.”

Applying a standard time value of money formula to these amounts, and then capitalizing them, results in even wider differences, Greenwalt says.

“The value of direct payments for the Midwest 50/50 corn/soybean rotation is $343 per acre, but for the Mid-South 50/50 rice/soybean rotation it’s $1,057 per acre.

A dramatic difference

“This becomes even more dramatic when you look at those numbers as a percent of land value. USDA statistics show the state average land value in Illinois in 2010 was $4,500 per acre. If you apply the $343 capitalized value of direct payments, direct payments represent only 7 percent of land value.

“But when you apply the $1,057 capitalized value of direct payments to the 2010 value of $2,500 per acre for Arkansas rice/soybean farms, it amounts to 42 percent of land value.”

The analysis assumes there would be 100 percent capitalization of the direct payment, which is probably not the case, Greenwalt says, “but the comparison shows why elimination of direct payments might well be a non-event in the Midwest, but a serious issue for Mid-South rice/soybean producers, and some cotton producers.

“While direct payments are relatively insignificant to Midwest farmers and landowners, they would certainly be missed by Mid-South farmers, who could expect some impact on land value and land rent.”

While Mid-South growers “realize there are going to be some cuts” in farm programs in the federal budget reduction process, they would nevertheless “like to have something to lessen the impact of that loss,” Greenwalt says.

In response to a question about how loss of direct payments would affect land rents, he said, “If there was nothing to replace direct payments, I think something would have to happen to happen to land rents. But no one wants to think about it — everyone is hoping there will be something to fill the gap if direct payments are lost.”